What does it mean when someone co-signs your loan?

When a parent or someone else co-signs your student loan, the lender will see you as the primary borrower and your co-signer as a secondary borrower. So if you fall behind on your loan or stop making payments, the lender can go to the co-signer to seek money.

Some lenders may require you to have a co-signer for your student loan. That’s because you may not have an established credit history, or the lender thinks it’s likely you’ll have difficulty making payments.

On the other hand, you may want to have a parent or other family member co-sign your loan in order to secure a lower interest rate than you would receive on your own.

When a parent co-signs your loan, the lender will consider their credit history to establish the interest rate you’ll pay. If their credit is excellent, that can help you pay less interest over the course of the loan.

Why would someone NOT want to co-sign a loan?

When someone co-signs your student loan, they become equally responsible for the repayment of the debt. That’s a big risk for someone else to take on your behalf, even when it’s mom or dad.

Your co-signer doesn’t control how much you borrow. Plus, they are dependent on you to make payments. Missed or late payments will be a black mark against both of your credit scores.

Lenders can also send collection agencies to call your co-signer to request payment on a delinquent loan. They also have the right to take them to court. If your co-signer comes from your extended family—a grandparent or an uncle, for example—they may not even know you’re behind on payments until the collection agency starts making phone calls.

Defaulting on a loan that’s co-signed with your parents can make it more difficult for them to apply for other loans such as a mortgage or auto loans. It can also mean they pay higher interest rates on those other loans too.

You can imagine what family gatherings and holidays will be like if you default on a co-signed loan. If you decide to go this route, be certain of your intentions to make payments before you ask a parent or family member to co-sign your loan.

How can you make this easier for everyone?

Apply for federal student loans first. Federal loans do not require someone else to co-sign, and you don’t need to go through a credit check when you apply. A federal loan may also offer lower interest rates and other advantages over a private student loan. (The Department of Education offers a helpful side-by-side comparison.)

Your parents may also have options with federal student loans through the Direct PLUS program. For your parents to qualify, you will have to meet the standard federal student aid requirements. They will also have to go through a credit check; if their credit is poor, they maybe turned down for a federal loan.

Exploring all of your options through the federal government will show your parents or other co-signers that you are acting in good faith by asking them to co-sign your private loan.

You can also help ease their concerns by having an honest and open discussion before they sign on the dotted line. Show them that you understand the payment terms for your loan and how the interest rate affects your total cost.

You can also come to the table with your own written agreement, promising to make adequate payments -- more than the minimum when you can -- and to do it on time every month. You can also send them proof of every payment you make, so they can see you’re being true to your word.

Borrowing money is a big responsibility. Sharing that responsibility with a parent or other loan co-signer can help you demonstrate you’re ready for the challenges that come with greater financial independence.

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